Low Cost Benefit Options: Doomed from the beginning?

Andre Bellingan

The medical schemes industry was taken aback when the Council for Medical Schemes retracted its framework for Low Cover Benefit Options (LCBOs) on 12 October 2015, barely a month after it had been published at the end of a consultative process.  It appears that this retraction was at the behest of the National Department of Health, which had received a number of submissions that objected to aspects of the LCBO framework.

The “mandatory minimum” package of benefits as well as the tests and treatments mandated by the LCBO framework was criticised by parties such as the South African Medical Association.  SAMA published a statement characterising the minimum LCBO benefits as being insufficient.  It also criticised the list of covered conditions and prescribed treatments as lacking of a scientific basis and not being appropriate given the burden of disease amongst the the target market.  SAMA and other critics like the South African Communist Party said they could not see any value in such a product.

This criticism is held to be the reason for the framework being retracted.  At the time the CMS stated that the feedback received from various stakeholders would need to be considered.  This has created the expectation that a revised framework will be published at some time in the near future.  Medical schemes who have been working on their business plans for LCBO products (or had them ready for submission to the CMS) are now playing a waiting game.  How long will they wait?

If it has not done so already the industry must consider that the answer to that question may be “indefinitely”.

Consider some history.  The basic idea behind LCBO products is not a new one.  A decade ago the Low Income Medical Scheme (LIMS) task team tackled the problem of extending medical scheme coverage to a larger part of the population.  They found that the root of the problem was that medical scheme contributions are unaffordable to most South Africans.  The task team identified various reasons for the high cost of medical scheme cover.  Some of these are easier for the medical schemes industry to fix on its own than others.   The cost of providing the comprehensive benefits contained in the Prescribed Minimum Benefits (PMB) package was identified as a significant barrier to making medical scheme membership more affordable.  The PMB package serves an important purpose: it ensures that all medical scheme members will receive the treatment they need and are protected from the financial consequences, in the form of medical bills at least, of a catastrophic health event.  This minimum package of benefits comes at a cost, though.  The most recent estimate places this at around R508 per beneficiary per month.

The logical market for medical schemes to expand into consists of individuals who can afford to purchase some form of medical cover but have not.  It is estimated that there are around 7.5 million actively employed South Africans who do not belong to a medical scheme.  A monthly price in the range of R200 to R450 per member (or family) per month is considered affordable in this market.  Compare this range to the cost of PMBs above and the problem is obvious.  The solutions appear to be obvious as well:  either remove benefits from the PMB package until the cost drops into the target range or reduce the cost of providing those benefits.  Medical schemes will contend that the latter is extremely difficult in the current environment and when any savings that may be gained from managed care interventions have met with the law of diminishing returns.  The LIMS task team therefore recommended that these more affordable products should offer a reduced package of benefits.  Think of it as PMB-lite, a minimum package of benefits that would be focused on private primary healthcare and would not offer private hospital benefits.  The reasons for excluding hospitalisation are that they are expensive but also that LCBO products need to be properly differentiated from “full” medical scheme cover.

The makeup of the PMB-lite package was informed by research aimed at identifying what the target market would be willing to pay for and, on the understanding that low contributions can only buy limited benefits, which benefits have a higher priority than others.  It turned out that respondents placed more value on primary healthcare services such as GP and pharmacy benefits than on private hospital cover, with some exceptions such as maternity.  They also prized private emergency medical evacuation services.

It is important to note that the recommendations of the LIMS task team were never implemented.  For the most part the LCBO framework follows the same rationale as the LIMS report and the same factors that counted against LIMS are therefore still relevant in any assessment of the framework, together with events that have occurred in the intervening years.

For reasons that do not need to be explained here equality is an important consideration in just about everything we do or discuss in this country.  Most South Africans do not know what the Social Solidarity Principle in healthcare is but they have an appreciation of its basic idea:  that people should not be denied the healthcare they need because they cannot afford it.  In such an environment creating what amounts to an underclass of medical scheme members, defined by their (in)ability to pay full medical scheme contributions was never going to be politically or socially acceptable.  The government’s policy since 2007 has been to implement National Health Insurance in the pursuit of Universal Healthcare.  This policy is popular exactly because it promises that it will result in all South Africans receiving an equal level of access to healthcare and that those who can afford to pay will subsidise those who cannot.   LCBO products do not fit into this way of thinking.

The LCBO framework also owes its existence to an unusual process.  Instead of the Medical Schemes Act and its regulations being amended to allow for Low Cost Benefit Options, the LCBO framework hinges on the powers, granted to the CMS in the Medical Schemes Act, to exempt medical schemes from certain provisions of said act.  Granting regulators such powers is not unusual; the authority to grant exemption allow regulators to deal with new and unusual circumstances that cannot wait for regulation to catch up.  It is unlikely that the authors of the Medical Schemes Act envisioned this provision being used to the extent that is necessary for the LCBO framework to be workable.   The CMS resorted to this extraordinary approach because it does not have the power to change Medical Scheme regulation itself; its duty is simply to enforce it.  Without a sponsor in government this was the only way it could make it happen.

The initiative to develop the framework therefore did not come from the National Department of Health but from the CMS.  The stated intention of the LCBO initiative was to expand the Medical Schemes industry, which was a strategic mistake.  There are powerful factions in this country who despise private healthcare and its associated profit motive, referring to healthcare as a “public good”.  They would like to see the end of the medical schemes industry, certainly not its expansion.  If LCBOs could have been framed as a step towards NHI then things may have turned out differently.  Such framing is however difficult when there are no clear details on the roadmap to NHI – we have been waiting many years for the white paper on NHI to be released and provide some clarity.

A feasible LCBO product also requires buy-in from other stakeholders.  Adding the true cost of administration to the price of such products would make them unaffordable.  Medical scheme administrators appeared willing to make concessions to solve this problem, offering administration at a discount.   Other than potential members, medical schemes and administrators the most important stakeholders are private healthcare providers.  They would need to be willing to co-operate in terms of pricing, remuneration models and limits such as network restrictions, prescribed protocols and formularies.  These are necessary because the cost of providing benefits to LCBO members must be controlled in order to keep them affordable.  Failing this LCBOs face the same fate as existing medical scheme options:  annual contribution increases in excess of consumer inflation and/or incremental benefit reductions.  The South African Medical Association was evidently not on board with this as they were particularly concerned with the “impact it will have on the doctors and the complexity of the Designated Service Provider arrangements.”

The LCBO framework evolved in the relatively sheltered environment defined by the scope of the CMS’s powers.  Like flightless birds that evolved on islands without predators (think of the dodo) it was not equipped for contact with the world outside of that environment.  It was developed in the absence of clear support from government and other stakeholders.  Regardless of how well intentioned the LCBO initiative was it was going to face an uphill battle, even if (ignoring for the moment the fact that this is impossible) it could have developed a framework that pleased every stakeholder.

This entire sage once again highlights the lack of policy direction that causes great uncertainty in the South African healthcare industry as well as the resulting “regulatory limbo”.  This will need to change very soon.